Home » Story links » jjun0366's story links

Profit from Special Situations - Risk Arbitrage

By jjun0366 on Wed, 2008-11-12 04:50
(via www.oldschoolvalue.com)

Part 5 in the series of profiting from special situations. A primer on how Risk arbitrage works and what you need to know in order to implement the strategy.

jjun0366 on Fri, 2008-11-14 00:43
Title: I hear what you are saying

I hear what you are saying and you are right. You should always try to cover yourself up. The arbitragers are holding this one steady but Im not sure whether they are holding it up completely.

A majority of the hedge funds have probably sold out so a fallout of the deal shouldn't yield a 20% drop or so as you suggested. I'm speculating here though.

-----
www.oldschoolvalue.com

cbardy on Thu, 2008-11-13 17:50
Title: PSD

I think the downside to a cash only deal in this environment is grossly understated at just 10%. As of right now this name trades inline with its peers at a P/E just under 14. Arbs are holding this stock up right now. If this deal breaks this stock will go right into $20 and will probably see the bottom side of $19 which would be a greater than 20% downside. The safest way to hedge yourself is to buy Jan 09 $20 puts for $1.60 and sell a Jan 09 $30 call for $.25. This would bring your net cost on the hedge to $1.35. Most could speculate that this deal isnt going to get repriced to the upside so you arent limiting your gain by selling that $30 call. It may be to onces advantage if the stock traded close to $30 and you got exercised away before the deal officially closed. If the deal gets repriced to the downside your put hedges you out and your short call will certainly go to zero so you lock in a gain there. If the deal breaks and the stock goes south the puts should theoretically double in value with the increased volatility so the potential loss would be mitigated. Cash deals arent for the faint of heart if you arent hedged out.